Cash enters a company through certain channels, and leaves through other channels. This is known as the cash flow and falls into three general categories on the cash flow statement and on the balance sheet.
Money can flow into the business through the sale of goods and services, or through refunds from suppliers. At the same time, it may flow out due to payments to suppliers or refunds requested by customers.
Cash flow in operations includes the day-to-day transfers of funds in a company. On the balance sheet the dollar figures between the operating activities on the cash flow statement and the net income on the income statement rarely correlate exactly. This happens because the income statement measures assets beyond just cash.
Cash flow also includes financing activity. Money can enter the company via investment by the owners or shareholders, or investment via creditors in the form of loan.
The issuing of dividends to shareholders or the repayment of capital to owners and loans to creditors diverts money away from the business.
Investments provide another source of cash inflows and outflows. If a company invests their money (cash outflow), they will receive interest payments or dividends in return and receive full repayment on their loan when the loan comes due (cash inflow).
Companies can affect their cash flow through the proceeds of selling off assets (such as securities, equipment or property), or through the purchase of new assets.
Markle, K. (2004, August). Introduction to Accounting. Presentation delivered at Schulich School of Business, York University, Toronto, Canada.
Plant, Albert C. (2007). The retail game: playing to win: a guide to the profitable sale of goods and services. Vancouver: Douglas & McIntyre Ltd.
Pratt, Jamie. (2003). Financial Accounting in an Economic Context. New York: John Wiley & Sons.